MARKETS

US stocks are directionless Wednesday as investors look through several solid labour market indicators (JOLTS and ADP's private payrolls estimate) and hit the pause button ahead of Friday's more definitive US Payrolls report.

There was nothing new in Powell's second congressional testimony of the week other than to stress that "no decision" has been made for the March FOMC meeting.

As we wobble toward Friday's February Payrolls report in a market put on edge by hawkish remarks from Fed Chair Powell on Tuesday, the S&P 500 is displaying a pleasantly mild reaction to a couple of labour market indicators that suggest that demand for workers remains very strong.

• ADP thinks hiring remains robust. The ADP Employment index of private sector payroll additions was stronger than expected. The payroll processor's economists estimated that 242k new jobs were added in February in the private sector. 
• JOLTS says there are still many jobs waiting to be filled. Contrary to the numerous anecdotes of Tech layoffs, the JOLTS job reports indicated that there are still 10.8 million job openings in the US -- down from 11.2m a month ago but well above most forecasts that the decline would be more pronounced. 

Against this backdrop of better labour data and ahead of Friday's important payrolls report, it is perhaps encouraging to see that stocks and bonds today are relatively benign. Still, the critical data points have yet to be revealed (we get Payrolls Friday and CPI next Tuesday), but the risks of a higher and faster hike trajectory have risen after Powell clearly lowered the bar for a 50bp hike in March, possibly in an attempt to dodge the mounting criticism that the Fed has fallen behind the inflation curve again. Still, the data will ultimately have the last say, and there is plenty of time and evidence to tip the scales back to 25 bp, especially with the Fed in data-dependent mode.

The headwinds that were helping to slow growth last year -- bottlenecks, fading stimulus -- are decreasing this year, providing the conditions for an economic re-acceleration. Such a rebound would often be welcomed. However, with inflation still running at almost 5%, central bankers remain concerned that too much growth could foster in a 1970s-style era of unanchored inflation expectations. As a result, look for the Fed to remain diligent in its fight against inflation. And one should position the terminal Fed funds rate to be as high as 5.75%.

European equities were little changed yesterday, suggesting that the US monetary policy angst may not extend across the pond and may not even extend in the US -- especially since Chair Powell's statements show little change in long-term bond rates. 

Markets and the economy are grappling with many quirks, from ongoing reopening impulses to war in Ukraine. Plus, even if you think the Fed will keep raising rates to 5.75% through July, we are still much closer to the end of the rate hike cycle than the beginning (which started around 0%). And this might make for an interesting market set up in the weeks ahead.

OIL 

Crude oil prices were offered up a temporary respite to the hawkish Fed-induced (stronger US dollar) selling pressure after EIA estimated an inventory draw of 1.7 million barrels for the week of March 3, the first draw of 2023

With global markets in a surplus and Powell ready to double down in March if the net from NFP and CPI runs hot, oil traders have turned somewhat defensive, caught up in a misaligned macro malaise. ( China vs Fed)

FOREX 

A quiet day with FX operators entering an unusually packed calendar period over the next few weeks, and with event risk elevated, FX positioning has come into focus. 

However, the CFTC's IMM report, a widely used measure of FX positioning, has been unavailable for several weeks, limiting participants' insight into FX ownership. So outside of those who use alternative data (price-based measures, risk reversal, etc.)  or have access to Prime Broker data, many folks are flying blind.

The Dollar built up a large overweight into the end of 2022, after which optimism about disinflation started to flip the Dollar’s beta to data surprises, making it more sensitive to downside surprises than upside surprises. Since then, however, the market narrative has shifted, and the gap between the Dollar’s beta to negative and positive data surprises has narrowed, suggesting positioning is a bit more balanced.

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